Many people will be familiar with the information gathering and
reporting requirements the OECD's Common Reporting Standard
("CRS") places on financial institutions. The first
exchanges of information between tax authorities will take place
next year, with all CRS jurisdictions exchanging information by
2018. And we are now starting to see how tax authorities expect
this information to change the taxpayer/tax authority dynamic.
In the UK, the tax authority HM Revenue & Customs (HMRC)
recently published a consultation document setting out its plans to
introduce a “Requirement to Correct” ("RTC")
for any income tax, capital gains tax, or inheritance tax payers
(including non-UK residents) who have engaged in certain
non-compliant behaviour involving the use of a non-UK jurisdiction.
HMRC is proposing to give these taxpayers until 30 September 2018
to regularise their UK tax affairs before imposing increased
penalties for any “Failure to Correct”
("FTC") from 1 October 2018 onwards.
This proposed window of opportunity is expressly set against the
backdrop of the expected increased information-flows to HMRC once
automatic exchange of information under the CRS begins and as
countries start to publish registers of beneficial ownership in
keeping with the G20 High Level Principles on Beneficial Ownership
Transparency. The threat of increased FTC penalties if taxpayers
are found to have outstanding tax compliance failures associated
with non-UK issues once this window is closed is intended to offer
a final incentive for affected taxpayers to sort out their UK tax
The most obvious category of taxpayer affected will be UK
resident individuals, but the increased FTC penalties will also
apply to other income tax, capital gains tax, or inheritance tax
payers which could include non-UK resident trustees, individuals or
companies. Further, while the consultation document is framed in
terms of "tackling offshore tax evasion", the scope of
tax matters to which HMRC intends the increased FTC penalties apply
appears to be wider than that phrase on the face of it implies.
"Offshore" in this context means any non-UK jurisdiction.
"Evasion" traditionally refers to criminal behaviour but
the increased FTC penalties framework appears to be aimed at many
kinds of tax irregularities with an offshore connection, including
potentially where reasonable care was taken, the only defence being
if there was a reasonable excuse for the taxpayer not having made
use of the RTC window. While common sense might suggest that having
taken reasonable care to comply with one's tax obligations in
the first place should count as a reasonable excuse for not having
made use of the RTC window, it is important to note that HMRC
expects the reasonable excuse defence only to be relevant in rare
cases, which indicates that HMRC may view this differently.
In order to avoid the increased FTC penalties, taxpayers who
would be subject to the RTC would be required to correct their UK
tax affairs in respect of any UK tax liabilities which would
essentially still be within the statutory time limits for discovery
assessments by HMRC. At a minimum, therefore, taxpayers would be
required to regularise their tax affairs from the previous four
years of assessment. Taxpayers whose actions were deliberate would
have to disclose and settle such tax liabilities from the previous
twenty years of assessment.
The consultation seeks input from stakeholders on how the FTC
penalties should be structured. The consultation sets out two
alternative models. In summary:
the first model suggests a maximum
and minimum FTC penalty (likely to be 200% and 100% of the lost tax
revenue respectively), with the actual figure decided based only on
the extent of the disclosure and cooperation provided by the
individual, with additional asset-based penalties for tax losses of
the second model sets out a tiered
set of penalties (the illustrative range being from 30% to 200% of
the lost tax revenue) which would apply, together with potential
asset-based penalties for more egregious cases, depending on
whether disclosure was prompted or unprompted and various other
factors, such as the behaviour of the individual, the amounts
involved, and whether the non-UK jurisdiction involved is a CRS
The proposals contained in this consultation are the latest in
the series of new and proposed measures intended to give HMRC more
tools to use in its on-going battle against tax evasion, but could
have effects beyond taxpayers who deliberately evade tax. It is to
be hoped that sufficient safeguards are included in the final
proposals to protect the position of taxpayers who take reasonable
care to comply with their tax obligations and do not set out to
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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